If you’re running a micro, small or medium enterprise (MSME), chances are you’ve hit that point where you need a financial push, maybe to restock inventory, upgrade equipment, or even just keep operations running smoothly. And when you start exploring funding options, two terms come up over and over: working capital loan and term loan.
Understanding the differences between the two can help business owners make better, more strategic decisions. Here’s a closer look.
What is a Working Capital Loan?
A working capital loan is meant to support the short-term financial needs of a business, paying for salaries, utilities, rent, or raw materials. These loans, typically offered with a tenure ranging from 6 months to 2 years, help cover operational costs during cash flow gaps.
Expanding companies can access multiple working capital funding options, including overdraft arrangements, credit lines, and accounts receivable discounting. Working capital lenders, including banks and Non-Banking Financial Companies (NBFCs), offer these loans with relatively fast processing and flexible terms, making them a popular choice for MSMEs.
What is a Term Loan?
A term loan is a borrowing option where a business receives a lump sum amount upfront and repays it over a fixed period, usually in monthly installments.
If you are wondering what is a term loan typically used for? It is most often meant for long-term investments, such as purchasing equipment, expanding infrastructure, or entering new markets. The tenure for term loans can range from one year to even fifteen years, depending on the size of the loan and the lender’s policies.
Interest Rates and Repayment Terms
Working capital loans generally carry higher interest rates due to their short-term nature. Repayment terms may vary; some offer structured EMIs, while others allow bullet repayments.
Term loans typically have lower interest rates and come with fixed monthly installments. NBFCs often offer flexible repayment options, particularly beneficial for small businesses that may not qualify for traditional bank loans.
Flexibility vs. Stability
Working capital loans offer greater flexibility, making them suitable for businesses with fluctuating revenue cycles. Funds can often be accessed quickly and repaid once income stabilizes, helping MSMEs manage short-term financial pressures effectively.
Term loans, in contrast, provide long-term stability with fixed EMIs, enabling businesses to plan their cash flows and budgets with more certainty. They are better suited for enterprises looking to fund structured growth projects or make significant capital investments.
Choosing between flexibility and stability depends on the financial priorities and future plans of the business.
Conclusion
Picking between a working capital loan and a term loan relies on your business’s requirements, cash flow patterns, and financial goals.
For managing short-term expenses, a working capital loan is a practical solution. For long-term investments, a term loan is more suitable. With banks and NBFCs offering a growing range of financing options, MSMEs now have more access than ever to funding that supports both their day-to-day operations and future growth.
